Markets of course sold off hard last week. In fact, the SP500 experienced a 3.6 sigma break to the downside compared to the weekly option implied move, and Financials were hammered for a near 6 sigma loss.
As repeated since the beginning of the year, 2018 is a different regime requiring a different playbook. We see inefficient pricing in the options market which is significant given the magnitude of assets traded in the various S&P 500 products and its common use for capital deployment and/or hedging.
Looking forward on this shortened holiday week, risk is elevated with Monday alone pricing a + / - 42 point move and the weekly move through Thursday's close is nearly + / - 77 points or 27.6% implied volatility.
Implied Correlation is close to 3 standard deviations with focus squarely on macro factors moving markets; although, we would anticipate a reversion in the near term.
The calendar is modest with continued focus on news out of Washington and some Fedspeak.
The trillion dollar question is whether typical psychological averages like the 200-day moving average will hold and a recovery rally will ensue, or whether we will undercut the lows set in February putting in a lower low and bouncing tepidly for a lower high.
The average high low ranges have expanded significantly and to the downside. We saw this develop as price breached a pre-identified risk confluence zone in the SP500 of 2682.
That level, as well as the quarterly and weekly magnets will likely be tested for resistance this week.
However, given the high expected move, a wider net should be cast to the downside as well.
We logically expect the market to bounce from its current perch if 2578.25 is tested and holds; alternatively, 2539 and then 2500 come into play for a further downside liquidation break.
As we often write, if what we expect doesn't occur, the opposite move is usually more violent. Meaning volatility is sold and shorts are covered.
Monday's focus is actually quite simple. All eyes are on the 10-year note, as well as other treasury instruments, and whether travel toward 2.7% is targeted. This will set the path in Financials which lead to the downside. Also, it can't be ignored the damage done in Technology stocks such as FB and GOOGL. Their index weightings are significant. AAPL and AMZN (to a lesser extent) were relatively spared. It hasn't escaped us that in a matter of days an all-time high in the Nasdaq 100 occurred that many components are near breakeven or now down year-to-date.As is typical of downside breaks, we also will lean on whether the Dow 30 (DIA or its derivative DMM8) provides high resiliency and leads the indices higher.
Attached is some work product reviewed.
All the best,